Tax commission rejects major overhaul that would scrap current income tax

MARY DALRYMPLEAP Tax Writer

Published Tuesday, October 18, 2005

WASHINGTON -- President Bush's tax commission has rejected the idea of a national sales tax and has voiced strong misgivings over European-style consumption taxes, drawing complaints of timidity from critics who wanted the panel to scrap the income tax.

"Apparently they have dismissed out of hand the prospect of fundamental reform," said Leo Linbeck, chairman and chief executive officer of Americans for Fair Taxation, a group advocating a federal retail sales tax. "That's disappointing to me, as you might expect."

The President's Advisory Panel on Federal Tax Reform meets Tuesday to start wrapping up its work on recommendations for making the federal tax system fairer, simpler and better for economic growth. It's final report is due Nov. 1.

Last week, the panel's nine members opposed replacing income taxes with a national retail sales tax, voicing concerns about high tax rates and rampant tax evasion.

When it meets again today, the members will revisit the possibility of recommending a value added tax -- a levy used widely in Europe that imposes a tax on increased value of a product at each stage of production and passed on to consumers.

But the tax advisers last week brought up numerous problems and complications with the idea, from the possibility of creating a government "money machine" with quickly increasing tax rates to administrative difficulties for the Internal Revenue Service.

"I think it's going to be very difficult to get a consensus," said Connie Mack, the commission's chairman and a former senator.

The changes they have recommended, which leave the income tax system in place, have prompted some reform advocates to believe the panel won't embrace fundamental change.

"If this is the best they can come up with, we should have just saved the money and scheduled a debate in Congress over existing tax reform legislation," said Pete Sepp, spokesman for the National Taxpayers Union, a group that wants to replace income taxes with a retail sales tax.

"They failed to put forth a coherent statement that reflects the president's call for something bold and different," Sepp said.

The panel hasn't finished yet and still has recommendations to come, cautioned executive director Jeffrey Kupfer. The panel has smaller groups working on fundamental reform and drastic simplification that will discuss their work on Tuesday.

"It's a little premature for people to conclude that the panel is not addressing those types of issues," he said.

Ed McCaffery, law professor at University of Southern California, said the panel could yet embrace tax systems that combine income and consumption taxes, a hybrid that uses the best of both ideas. But history shows that recommendations like the ones the panel is endorsing to simplify the income tax system will not be enough to fundamentally change the system, because complications inevitably creep back in, he said.

"If you keep the income tax pretty much as is, there will not be enduring, long-lasting reform," he said. "I think it's now clear we have to do something else. Will they do something else? We're certainly not hearing it."

The idea of replacing the nation's income tax system with something unknown, like a retail or value-added tax, strikes others as virtually impossible.

The panel should promote major change, "but do it in the American tradition," said Ernest Christian, executive director of the Center for Strategic Tax Reform.

Christian wants the panel to embrace revisions that remove taxes from capital and savings and push the economy toward faster and better growth, ideas he thinks could be endorsed at the panel's next meeting. Major reform plans run against ideas too deeply embedded in American history, he said.

"They set themselves up to be disappointed because they were hoping for something which, as a practical matter, was never going to happen," he said.